Prediction Markets Need Prestige Signals to Fulfill Their Mission
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Essays<br>Prediction Markets Need Prestige Signals to Fulfill Their Mission<br>How to make forecasting more useful
Richard Hanania<br>Aug 01, 2026
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I used to be a big believer in the potential of prediction markets to radically transform the world. But over time, I have become less inclined to see them as something that could revolutionize the search for truth or as a phenomenon that might potentially end up only a few steps below discoveries like free speech and capitalism in importance.<br>People like to share opinions on politics. In theory, we should be able to settle major disputes through prediction markets. Do you think Democrats or Republicans are better for economic growth? Which approach to foreign policy is more likely to deliver global peace? All we need is to bet on GDP growth or global combat deaths conditional on each side winning an election. Do this enough times and, if the markets turn out to be well-calibrated, we might learn something new.<br>Pundits run their mouths and professors come up with theories, but if such figures started making actual bets and we could track their predictions over time, maybe we’d be better able to decide who to listen to. The best ways to fight crime, make societies wealthier, and avoid war could start to have scientifically precise answers.<br>I still believe that prediction markets are pretty well-calibrated. When, for example, I hear about an up-and-coming politician and want to see whether he has a chance in an election, I will check the prediction markets first. That is the single best source of information for many questions one might ask. I’m glad they’re de facto legal now, and support them continuing to be allowed on the grounds of both libertarian principles and the idea that knowledge is good.<br>One positive impact can be seen in the fact that there used to be more of a culture of pundits making off-the-wall predictions and getting attention for them. I’ve seen less of that in recent years, because we can always reply “if you believe that, why not bet on it?” And even though journalists can say it would be a conflict of interest to do so, the theoretical possibility still has an impact. We may accept that journalists don’t place bets, but nonetheless dismiss the wild speculator on the grounds that he hasn’t done a good job of convincing others of his views, because if he had, the market would have moved more. CNN will now point to prediction markets in discussing the likely outcome of an election, and that is clearly a superior method of covering the news relative to having talking heads spout evidence-free opinions, often based on what they hope is true.<br>Despite those clear benefits, I no longer think that prediction markets are going to come anywhere close to revolutionizing the search for knowledge or introducing a new system of government, or taking us toward a futarchic utopia, unless there is a real effort to merge financial incentives with prestige incentives.<br>Usually, when I change my mind on something, the effect is gradual. In this case, however, I can trace the shift in my thinking to one specific article. This was a May 2024 essay, “Why Prediction Markets Aren’t Popular,” by Nick Whitaker and J Zachary Mazlish. It was written before Trump won reelection and we got de facto legalization. The two authors argued that, while prediction market enthusiasts thought that the law was the main thing holding them back, there were more fundamental problems that they were ignoring.<br>There is one important reason that prediction markets are not used by savers, and probably never will be. Prediction markets, unlike most asset markets, are zero-sum – in fact they are negative-sum, once you factor in platform fees. And if your money is in a prediction market, it can’t be invested in equities, or be earning interest in the bank, either. Every winner of a prediction market necessitates an equal and opposite loser. Securities investors with diversified portfolios can expect positive returns in the long term, because they are giving up their money for others to use to create output and wealth, in exchange for a share of what they create. That’s why responsible people have their pensions in stocks and bonds, rather than a diversified portfolio of sportsbooks. Positive-sum savings vehicles are far, far superior to zero-sum ones, for the simple reason that they will grow your savings in the long run.
Since that time, we have gotten a new administration that has basically let the prediction market sites run wild, which has disproved the main thesis of the article – prediction markets have in fact become popular. But the essay was wrong in a way that proved some of its larger points correct. Whitaker and Mazlish wrote that gamblers wouldn’t want to participate because it would take too long to resolve bets and the topics were too esoteric, and that...